AIB Privatisation Reflects Irish Banking Sector Recovery

The first stage of Allied Irish Banks' (AIB) return to private ownership is a notable further step in the long recovery of Ireland's banking sector, Fitch Ratings says. The privatisation was able to get underway thanks to AIB's improving credit fundamentals, helped by falling unemployment, rising property prices and strong economic growth. Fitch projects real GDP growth for Ireland of 3.2% in 2017 and 2.7% in 2018.

The Irish state today completed the sale of 25% of the 99.9% stake it has held in AIB since the bank was taken into public ownership in 2010. The sale raised EUR3 billion, indicating that the government may ultimately recoup most of the EUR20.8 billion it invested in AIB. It has already received EUR6.8 billion from AIB in repaid capital, fees, dividends, coupon payments, and levies.

The shift in ownership does not change AIB's credit fundamentals or ratings, but the government's decision to start the sale process was due to the bank's improving financial profile, which this year enabled it to pay its first dividend since 2008. AIB's fully loaded common equity Tier 1 ratio was 16.0% at end-March 2017, up from 11.8% at end-2014 and comfortably above its medium-term target of 13%. The increase was driven by the partial conversion of AIB's government-held preference shares into common equity in 2015, deleveraging and solid internal capital generation.

AIB's asset quality, its main rating weakness, is also improving, with the bank managing down its stock of impaired loans, helped by property price growth, investor demand and a low inflow of new impaired loans. Impaired loans fell to EUR8.6 billion at end-March 2017 from EUR28.9 billion at end-2013.

AIB still has high proportions of forborne loans, low-yielding loans, including tracker mortgages, and defaulted but not impaired loans. However, we expect asset quality to continue improving in 2017, underpinned by a supportive operating environment, strong demand for Irish commercial property and the bank's proactive approach to reducing legacy assets.

AIB's 'BB+'/Positive Issuer Default Rating could be upgraded if the bank's asset quality improves further, but would come under pressure if the economic effect of the UK's decision to leave the EU is particularly severe for Ireland or the UK, which could slow improvements in asset quality and capitalisation. The UK represents about 10% of AIB's lending.